Invesco Turns Most Bearish on Dollar Since June 2024 Amid Fed Rate Cut Expectations

Invesco's senior portfolio manager has expressed a strong bearish outlook on the U.S. dollar, anticipating significant downward pressure as the Federal Reserve prepares to ease monetary policy. The narrowing yield advantage of the dollar relative to other currencies is cited as a key factor in this shift. In a September report, the team adjusted their stance on the dollar from "underweight" to "maximum underweight," marking their most bearish outlook since June 2024.

The manager emphasized that the narrowing yield differentials and positive economic data from outside the U.S. are driving this change in sentiment. The team's bearish view on the dollar is the strongest it has been since June 2024. The manager noted that while the dollar's yield remains higher than that of other developed market currencies, the expected erosion of the dollar's yield advantage has historically put downward pressure on the dollar. This could potentially drive non-U.S. equities to outperform U.S. equities, as U.S. capital seeks international diversification and foreign currencies appreciate.

Federal Reserve Chairman's dovish remarks at the Jackson Hole symposium last month have bolstered market expectations for a 25 basis point rate cut at the upcoming Federal Reserve meeting. This move has already been fully priced into the market. Traders anticipate that the Federal Reserve will cut rates by nearly 70 basis points by the end of the year.

Recent reports indicating a slowdown in the U.S. labor market have provided additional support for those expecting a rate cut. Traders are closely monitoring the August CPI report, scheduled for release, to gauge the extent of the Federal Reserve's easing policy this year.

Since April 2, when the U.S. President announced large-scale tariffs on U.S. trading partners, the dollar spot index has fallen by more than 5%. Following this, some investors have begun to diversify their portfolios away from the dollar and have taken measures to hedge against currency volatility.